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Small caps in slowdowns

Invesco global small cap manager Virginia Au shares where she's focused right now

Ruth Saldanha 12 March, 2020 | 1:48AM
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This article is part of our Women in Investing special report.

Ruth Saldanha: Recent global events have led to investors looking for safe havens, even as fears of recession or a slowdown increase. In this scenario does it make sense to consider investing in global small caps, an asset class that is traditionally considered riskier. Virginia, our Vice President and Portfolio Manager of the Bronze-rated Invesco Global Small Cap Companies Fund is here today to discuss her point of view.

Virginia, thank you so much for being here today.

Virginia Au: Thank you for having me.

Saldanha: Now, there are lots of fears in the market that there could be a slowdown or a recession. In this scenario, how should Canadian investors play the global small-cap space?

Au: Yes, there are a lot of uncertainties around the severity and duration of the coronavirus. And so we are actively monitoring the risk of a spillover effect into the second quarter and even third quarter. But I don't think this disruption will reverse the direction of the expected growth in the global recovery. From a bottom-up perspective, and having talked to a lot of management teams, we find that even at the end of last year, we were seeing a very good modest business improvement. And that inflection point was driven by easing trade tension and both monetary and fiscal easing around the world. So, we think that the global recovery will delay but not derail. And we continue to focus on the long-term drivers for our companies in our portfolio.

Saldanha: You mentioned one of the risks has been coronavirus. What are some sectors and countries where you actually see pockets of value right now?

Au: Yeah, we are seeing actually a lot of the travel-related names being hit very dramatically. But I mean, that's a timing issue, because again, the uncertainty around the severity of the coronavirus, but it could be a good potential opportunity to pick up some long-term compounder. In terms of country, we are seeing a lot of opportunity in the U.K., since 3.5 years ago, the Brexit referendum, the country has really had a lack of direction. And a lot of investor basically stay away from the U.K. And at the same time, the market was really factoring in or expecting a prolong economic downturn or recession, which did not happen in the U.K. And we used that opportunity to buy a lot of the industry leaders in the U.K. And fast forward to today, even though the last couple of months, the U.K. market has done well since the general election, we think that's just the beginning. We're still seeing a lot of strong businesses trading at attractive valuations.

Saldanha: One area that investors are extremely interested in is ESG. What are some of the ESG implications for global small caps?

Au: Yeah, we think ESG is an increasingly important factor to focus on for our shareholders, because I think poor environmental or social policy will hurt shareholders. And so for us, we look at a company's track record, and the industry best practices. One area that we do focus a lot on also is corporate governance because we think that's crucial to the long term success of a company. And, the benefit of being an active manager is that we get constant dialogue with the management to talk about our concern, with the aim to improve the company's long-term value. So we take all of these issues into consideration when we make the risk and reward assessment for every company.

Saldanha: Finally, the last thing I'd like to ask is for an investor how much of their portfolio in terms of percentages they hold in global small caps?

Au: Well, you're asking a small cap portfolio manager. So I'm going to say 100%. I'm just joking. It really should depend on the risk appetite of individual investor. But small cap do have a lot of positive and should be considered as a meaningful way in a portfolio. Because usually a lot of them have higher growth rate since they're growing from a smaller base and a lot of them are focused on niche fast growing area. And in addition, I found that you get a lot more mispricing opportunities because they're less covered by analysts. And we often see overreaction to news. And I think that's why small cap is a very attractive area for active managers.

Saldanha: Thank you so much for joining us, Virginia.

Au: Thank you.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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